Rethinking the Great Recession
By Scott Sumner
When I studied history, I was perplexed as to how the US could have done things like the internment of Japanese-Americans in WWII or the Joe McCarthy witch hunts of the early 1950s. Today, as I observe the growing anti-Chinese hysteria, these events are becoming easier to understand.
When I studied economic history, I was perplexed as to why economists of that period were blind to the costs of an extremely tight monetary policy that drove NGDP sharply lower during the early 1930s. Today, having seen a similar blindness in regard to the Great Recession, I’m no longer so perplexed.
The Economist has a very good (but also very depressing) article discussing how the field of macroeconomics has changed during the past decade. I take no pleasure in being right 10 years ago when I warned that misdiagnosis of the Great Recession could lead to the same sort of “dark ages” of economics as developed during the 1930s (and we escaped from in the latter 20th century).
Kevin Erdmann recently wrote a book pushing back against many of the myths regarding the housing bubble and bust, and I have a book coming out next April (University of Chicago Press) on market monetarism and the Great Recession. Until then, you might be interested in our joint Mercatus working paper, which presents some of the key ideas in both books.
PS. The Economist article is excellent, but does have one mistake:
Several factors might yet make the economy more hospitable to negative rates, however. Cash is in decline—another trend the pandemic has accelerated.
Actually, use of cash (mostly as a store of value) has increased sharply under Covid-19. That makes the economy slightly less hospitable to negative rates. Cash is a substitute for negative rate bank deposits.